Ladies and gentlemen, thank you for standing by, and welcome to the TransMedics Q1 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Brian Johnston at Gilmartin Group. Thank you. Go ahead, please.

Thank you, operator. Earlier today, TransMedics released financial results for the quarter ended March 31, 2020. A copy of the press release is available on the company's website. Before we begin, I would like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results or performance are forward-looking statements. All forward-looking statements, including, without limitation, our examination of operating trends, the potential commercial opportunity for our products and our future financial expectations, which includes expectations for growth in our organization, regulatory approvals and reimbursement and guidance and/or expectations for revenue, gross margins and operating expenses in 2020 are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our annual report on Form 10-K filed with the Securities and Exchange Commission on March 17, 2020. TransMedics disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, May 6, 2020. And with that, I'll now turn the call over to Waleed Hassanein, President and Chief Executive Officer.

Thank you so much, Brian. Good afternoon, everyone, and welcome to TransMedics' 1Q 2020 earnings call. Joining me today is Stephen Gordon, our Chief Financial Officer. Given these unprecedented and challenging times and circumstances, I want to start our call by extending my well wishes and gratitude to all the health care and transplant professionals as well as the TransMedics clinical support team, who are on the front-lines, ensuring that organ transplant procedures are continuing during this devastating COVID pandemic. In response to the COVID pandemic, we have taken extensive actions to minimize its negative impact on our team and our business. We focused our actions on three main areas: one, protecting our employees and their families; two, continuing to support our customers and transplant users globally; and three, maintaining the financial health of our business to enable us to weather this pandemic and emerge out of this crisis stronger. Let me share the details. To protect the health and safety of TransMedics employees and their families, TransMedics has enacted policies in line with federal and local government and health care agencies to transition employees to a remote work environment, with the exception of those who are deemed essential to key business operations for TransMedics. Given the organ transplant procedures are an essential and nonelective procedures, during this crisis, TransMedics has made a clear and strong commitment to support our global customers with product and clinical support throughout this pandemic. TransMedics' clinical field support team remained available throughout the COVID crisis to support our customers, either in person or virtually. Last point is expense management. TransMedics has taken actions to maintain financial flexibility as the trajectory of the pandemic evolves. The company has taken preemptive measures to reduce near-term expenses, including reduction of nonessential, R&D and SG&A expenses. In addition,…

Thank you, Waleed. I will provide some additional detail on the Q1 results and our actions to preserve cash during this somewhat uncertain time. For the first quarter of 2020, our gross revenue was $8.2 million, and our net revenue was $7.5 million. Net revenue grew 61% from the first quarter of 2019. And in the U.S., our gross revenue was $5.9 million and net revenue was $5.2 million, and that U.S. net revenue growth was 76% from the first quarter of 2019. The organ breakdown on the U.S. net revenue was $1.9 million in OCS Lung, $1.9 million also in OCS Heart and $1.4 million in OCS Liver. And outside of the U.S., our revenue was $2.3 million, $2.2 million of that was OCS Heart. So that should give a good breakdown of the product level detail. The key drivers of our revenue growth in Q1 was continued OCS adoption across all organs. U.S. lung revenue was up 42% from the first quarter of 2019, and our U.S. clinical trial revenue from both OCS Heart and OCS Liver contributed significantly. And our ex U.S. revenue grew by 35% from the first quarter of 2019. Our gross margin for the first quarter of 2020 was 65%, continuing to progress in the right direction. That's up from 55% for the first quarter of 2019, and that's up from 62% last quarter in Q4 2019. Our total operating expense was $12.9 million in the first quarter of 2020, 51% growth from the first quarter of 2019. Our operating loss was $8 million in the first quarter of 2020 compared to $6 million in the first quarter of 2019. And our net loss for the first quarter of 2020 was $8.9 million compared to $6.9 million in the first quarter of 2019. Finally,…

Thank you, Stephen. As seen in our Q1 results, we began 2020 with strong momentum, and we are on track to achieve significant growth this year, then the COVID pandemic happened. While we expect that our business will be negatively impacted in the near term, we're extremely confident in TransMedics' long-term prospects and our robust pipeline of new clinical indications and data supporting the value for the OCS technology. In the meantime, we've taken extensive measures to mitigate both health and business risks, while preserving cash to best position TransMedics as we emerge from this crisis stronger to continue our mission to transform organ transplantation. Finally, I want to take a moment again to thank the transplant health care workers and TransMedics team on the front lines during this pandemic, ensuring that organ transplantations are continuing to help patients in need. Thank you so much for joining us on this call. And now we will open up the line for questions. Operator?

[Operator Instructions] And your first question comes from the line of David Lewis with Morgan Stanley.

Hi good afternoon. This is Kelvin on for David. A couple of quick questions for me. Could you please provide some more color just on early phases? You commented on early phases of stabilization. Just wondering if you could provide some quantitative guidance on what trends you're seeing in April? Are you seeing any sort of recovery by the end of April? And if you could comment on just the recovery in 3Q and 4Q and how closely you can now approach your pre-COVID budget by 4Q. And then I had a quick follow-up.

We really started seeing some early signs of recovery towards the second half of April. We are encouraged by it. But as everybody in this call is aware that there's a lot of uncertainties remain in the system with the social distancing easing in some states that could result in another rebound of COVID. I think the transplant community is going to be more prepared this time. But it's way too early to really change our opinion that this is going to continue. This disruption will continue through Q2. However, we – as I stated, Kelvin, that as we see the peak stabilizing and the number of hospitalization kind of stabilizing, we are expecting to see improvement in activities in Q3 and hopefully trying getting to near normalization in Q4. That's our expectation at least. But again, there's a lot of uncertainty and unknowns surrounding if we're going to get hit with another peak. Where is it going to be? How much is that going to impact the transplant procedures, et cetera? But we're beginning to see some early signs of recovery in the second half of April.

Understood. And could you – sorry, could you quickly comment on just how important New York and Boston are to your business?

I think they're big cities. From our business standpoint, I think Boston is important. New York is not as important as Boston. But it's not necessarily about the local geography. The surge in New York paralyzed the entire East Coast and we were shipping patients from New York City down to other states to get transplanted. So I think I addressed your question. So it's not just – even though we don't have a – New York were not dependent in New York, but because of the surge, everybody was staying away from New York to approach for donation.

Got it. Understood. That's very helpful. Just a very quick follow-up on just upcoming catalysts. You commented on the heart panel. Just curious on if there is any progress on confirming a virtual panel with the FDA on the heart and then on liver. Any updates on readout or publication strategy, just given kind of the conference going virtual or cancellation dynamic?

Sure, sure. So related to the heart panel, we are actively discussing this with FDA, and it appears that the FDA is aiming to reschedule this panel meeting sometime in the second half of this year. We think it's going to be in the late Q3 time frame. But until we have a definitive date, we're going to be – I'm sure about that. The goal is to try to set a date that hopefully would enable us to be – to have the meeting live with the fallback position to have it as a virtual meeting through WebEx or the like. That's the strategy that the office of cardiovascular devices wanted to pursue, and we're very supportive with it. Related to the liver PMA, the trial results are known to us. And they are extremely, extremely exciting to us, and we cannot wait to publicly announce the results. And as a testament to the results, the PMA time line is not going to be delayed, and we are submitting that PMA in Q2 2020. We're hoping that given the strength of the results that we'll actually – we're going directly towards a major submission of manuscript to a major publication. And we hope that, that will happen over the next several weeks. The results are very, very strong. They're the first of its kind type results. And we're very excited to work with our lead investigators to support them in any way we can to get these trials published as soon as possible.

And your next question comes from the line of Robbie Marcus from JPMorgan.

Great. Thanks for taking the question. I wanted to talk about, as we move through the recovery, how are you thinking about hospitals' willingness to adopt the technology here. I don't think there is much of a capital component involved that charged the hospitals, but I imagine it's also going to not be top of mind to bring new products into a hospital system during the recovery. So help us understand how you're thinking about the ramp-up in bringing new centers online and what you could do now to help accelerate that process over the rest of the year?

Sure. Thank you, Robbie. As you remember in my last call, I stressed the fact that our strategy has never been about ramping up new centers. We have critical massive centers already that already have the technology that's already been trained on the technology. So for us, it's driving the volume through these institutions. So that's one part of the answer. The second part of the answer is as we broaden our service model, it's no longer going to be – our revenue growth is not going to be relying on the institutional ability to bring capital equipment, but it's really the organ will be delivered to any institution across the U.S. for the transplant procedures with us retaining the ownership of the hardware. So these are the two approaches that I referred to in my – on the call that broadening our service initiative is going to enable us to do with very little, if any, impact at all about capital equipment or opening up new centers. We expect to open up new centers. We have a robust pipeline and potential new centers that we expect to open in 2020. But we have a critical mass already in hand with hardware already available that we expect to drive our growth near term from those institutions supplied – supported by the service market.

Great. And maybe just one follow-up. How should we be thinking about the liver trial here? I imagine with things on hold, there's going to be some delay. But what's your thought on timing for that now?

We are not pulling back on the liver trial. Again, the results, when they become public, they will speak for themselves. We are – we have already initiated the continued access protocol for it. We expect that the review process within the FDA will be within the targets we've set. Our PMA filing will be according to our original plan in Q2, which is six months ahead of our original plan. So we're not expecting any reduction or pullback on the liver, the opposite is true. Once these results become public, we expect that the cap will be rapidly enrolling, and we're probably going to expand the cap. And we will leverage the results to encourage the FDA to hopefully accelerate the review process.

Okay. Great. Thanks.

And your next question comes from the line of Josh Jennings with Cowen.

Hi. This is Bryan here for Josh. Thank you for taking my questions. To start, can you share details on the volumes you experienced in March as compared to February and January? Are volumes down as much as 50%? And I guess as part of that, how would you characterize April volumes? And maybe are you seeing improvements regionally or stabilization, particularly in centers outside the U.S.?

We never commented on volumes per se, but I'll give you just a metric. The – we've seen in – starting the second week in March through the first week in April, transplant volume in the main regions went down to 0. It's public knowledge, given that it was in a webinar, that the donor activities in the New York area went down from 482 donors in February down to four through March and early April. So there's a significant decline. In April, we are seeing – in the second half of April, we started seeing activities, as I stated earlier. It's nowhere close to the volumes in February, but definitely starting and it's starting across a broad – regions in the U.S., not just in the Northeast with experienced transplants in the Midwest, South and the West Coast, in addition to Northeast and Mid-Atlantic. So we feel that the recovery is starting. Again, we're keeping our fingers crossed that we don't get another peak somewhere that would – that could have a negative impact on this recovery.

Understood. And maybe one for Stephen. You previously cited a monthly burn rate of around $2.5 million. Is that still where you're currently tracking with the expense controls you cited? And I guess, on the strategic areas for increased spending, will that pick up in the third quarter in anticipation of a more normal fourth quarter?

Yes. That's a good question. I don't expect us to be able to maintain the same burn rate. We do expect to have a revenue hit here. We're going to do everything we can to maintain it, but I do expect it to have a higher burn rate, at least for the next several months, maybe in the $3 million range rather than $2.5 million. However, we think we still have a pretty good runway. And we're going to watch it closely. And if we need to make some changes, we can do that. As far as the investment I talked about, some of that is already in, in Q1. I don't think it's going to be material to the overall spending. But it's already in Q1 and some of that, you'll see that in Q2.

[Operator Instructions] Your next question comes from the line of Suraj Kalia with Oppenheimer.

Good afternoon, Waleed. Good afternoon, Stephen. So Waleed, three questions from my side. I just heard some commentary from your side about 400-plus organs in the New York area, and then it suddenly dropped off to single digits. I guess more broadly, what is happening to these organs? And maybe I missed it, were those just 400 hearts or were those across the board? Specifically on hearts, where are these organs – donor organs going? Or are there just less fewer accidents, and hence, fewer organs available? Just kind of walk us through the background. What are the dynamics that are happening, especially in time-sensitive organs such as the heart?

Thank you, Suraj. So I want to be specific. The webinar from the New York area was talking about donors in general. It was not donor availability in general. It was not about a specific organ. And to answer the question, where do these organ go? There was not – they were not donated. They were not donated. There were no donor retrieval or processes in the New York area throughout the month of – second half of March into the first half of April. So there was no transplant activities whatsoever. There was no retrieval process. The whole thing came into a screeching halt. It doesn't – it didn't – I don't want you to misunderstand that these organs were transplanted somewhere else. There was no donation process at all. So where do these organs went? These organs stayed with the body of the deceased, and they were buried and they were not retrieved. They were not used for transplantation at all. What it creates, however, it's a pent-up demand on the waiting list for the heart patients who are waiting in New York, the lung patients, the liver – everybody who's waiting for an organ transplant. So that's what it creates. That's what I referred to in my statements about the pent-up demand because the waiting list continued to grow throughout the COVID pandemic. It didn't stop. The need for organ transplantation continues to grow and the waiting list continued to grow throughout this time.

Fair enough. Very clear. Waleed, obviously, the ultra-concentrated nature of these transplant centers, especially in the U.S., would you care to characterize the current state of capitalization of these centers? And the reason I ask is, it's no secret. It's all over the news how financially devastated hospitals are. It looks like they're going to be seeking another $100 billion, $200 billion, just in general. Transplant centers, obviously, are relatively much more profitable given lucrative reimbursement. But in this current environment, is that a dynamic that you all have to worry about where the centers – let's say, it gets prolonged to end of Q3, God forbid. Just give us some color on your assessment of the current state of capitalization of these 50 or 70 key centers in the U.S.

Sure. So thank you, Suraj. So let me address that question in two different levels. So let's talk about the transplant centers that are – that already – we have 18 lung centers, 17 heart center and about 17 liver centers that are already equipped with OCS today. Within these institutions, they drive a significant portion of the volume. So these institutions are not going to be looking to make any more capital equipment budget for their programs, which is the risk that I think you're asking and Robbie mentioned in his question as well. But let's look at it from the other side, which you're hinting to, and I hinted to in my presentation. Everybody knows that centers and hospitals across the U.S. and across the world, they're losing significant amount of revenue and significant amount of – yes, significant amount of revenue. When you look at the transplant procedure, it's one of the high-margin procedure. It's a nonelective procedure. It's an emergent procedure. So definitely, we expect those procedures to be prioritized within these centers. Now the question – the other layer of your question is, why would they use the OCS? Well, because what we're working on in TransMedics is not to make that a question anymore. We are going to be leaning forward into the storm, into this crisis, with our technology, with our team, with our service model, with our relationship with OPOs to make sure that if there is an organ somewhere out there that we are going to retrieve it, assess it, optimize it and work with the OPOs to allocate it and deliver it to the transplant center. That's what I was referring to that this is the area that our strategy is to lean into this storm, not to lean back, lean forward and really establish ourselves as the key partner to that transplant paradigm in the U.S. during and post the COVID era.

Got it. And Waleed, quickly, finally, and I'll hop back in queue. The liver data to be released in a few months, I presume it is going to be – it would allow us comparison to static cold storage. Specifically, we would get in graft survival and causes of failure and so on and so forth, correct?

Absolutely, absolutely, absolutely. This is a randomized controlled study compared to cold storage, and it will show us results – significant results of differences, showing significant differences on the OCS arm compared to cold storage on many key clinically important end points, effectiveness end points, safety end points and a long-term signal that are critical for the long-term success of liver transplantation and DCD transplants.

Got it. Gentlemen, thank you.

[Operator Instructions] And this concludes our Q&A session, and I would like to turn the call back over to Waleed.

Great. Thank you so much. We appreciate you taking the time to be on the call, and we hope all of you are safe and healthy and stay safe. Thank you so much. Have a great afternoon.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.